Inter-State Transfer of ITC on Merger: Kerala AAR Opens the Door for Cross-GSTIN Credit Movement
When companies merge across State lines, assets and liabilities travel seamlessly on paper. But does the Input Tax Credit (ITC) sitting in one State’s electronic credit ledger have the same freedom of movement?
The Kerala Authority for Advance Ruling (AAR), in M/s Flytxt Mobile Solutions Pvt. Ltd. - [2025(07)LCX0680(AAR)], has given a significant and taxpayer-friendly answer: yes, ITC in the form of CGST and IGST can be transferred from one State’s GSTIN to another on merger, even where the GSTINs belong to different States - and the law does not restrict this.
The only villain, as usual, is the GST portal.
1. Background: A Cross-Border Merger Meets a Rigid Portal
The applicant:
M/s Flytxt Mobile Solutions Private Limited, based in Technopark, Thiruvananthapuram, is engaged in supplying information technology software services through cloud-based analytics, AI and marketing automation solutions. It is registered under GST in Kerala, bearing GSTIN 32AABCF1310L1Z7.
For business and restructuring reasons, Flytxt merged with two other companies - M/s Mventus Solutions Private Limited and M/s Madmart Services Private Limited - pursuant to an order of the National Company Law Tribunal (NCLT) dated 08.06.2020, effective 01.04.2018. After the merger, Flytxt became the sole resulting entity, with all assets and liabilities of the merging companies vesting in it.
One of the merging entities, Mventus Solutions Pvt. Ltd., was registered in Haryana (GSTIN 06AAHCM3636Q1ZY) and, as on the merger date, had unutilised ITC of Rs. 22,29,668 in its electronic credit ledger.
Flytxt attempted to transfer this ITC from the Haryana GSTIN of Mventus to its own Kerala GSTIN using Form GST ITC-02, the prescribed form under Rule 41 for transfer of credit on sale, merger, amalgamation etc.
The GST portal, however, flatly refused with the error message:
"Transferee and Transferor should be of same State/UT".
The legal question was simple but important:
Does the CGST Act or the Rules prohibit inter-State transfer of ITC in a merger scenario, or is this only a portal limitation?
2. Legal Framework: Section 18(3) and Rule 41 - What the Law Actually Says
The applicant relied heavily on Section 18(3) of the CGST Act, 2017, which provides that where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business, with specific provision for transfer of liabilities, such person is allowed to transfer the unutilised ITC in the electronic credit ledger to the sold/merged/amalgamated/transferred business in the manner prescribed.
The "manner" is laid down in Rule 41(1) of the CGST Rules, 2017, which requires the transferor to:
Furnish details of the merger, demerger, sale, amalgamation, lease or transfer in Form GST ITC-02 on the common portal; and
Request transfer of unutilised ITC lying in its electronic credit ledger to the transferee’s GSTIN.
Notably:
Neither Section 18(3) nor Rule 41(1) restricts the transfer to intra-State situations only.
The language is completely neutral as to State - it focuses on "change in constitution" and "transfer of liabilities", not on geographical boundaries of registrations.
In parallel, the applicant pointed out that no provision in the Act or Rules blocks the transfer of ITC between GSTINs of different States when the business is merged and liabilities are taken over.
Thus, in their view, the only "obstacle" is technological, not legal.
3. Applicant’s Arguments: Law vs Portal
The applicant advanced a structured set of contentions:
1. Merger fully satisfies Section 18(3) and Rule 41 conditions
There is an NCLT-approved merger effective from 01.04.2018.
All assets and liabilities of the merging companies (including Mventus) stand transferred to Flytxt (the resulting entity).
This is exactly the scenario contemplated in Section 18(3).
2. No statutory bar on inter-State ITC transfer
The applicant stressed that neither the CGST Act nor the Rules contain any words limiting ITC transfer to the "same State". The portal’s insistence that transferor and transferee GSTINs must be in the same State has no backing in the statute.
3. Reliance on an Andhra Pradesh AAR
A similar issue had earlier come before the Andhra Pradesh AAR, where inter-State transfer of unutilised ITC on merger was permitted. The applicant relied on this as persuasive support for their position that inter-State transfers are permissible in principle.
4. Portal cannot override substantive rights
Denial of ITC purely on account of a technical configuration of the portal would amount to defeating a substantive legal benefit conferred by the legislation. In a merger, all assets and liabilities must logically flow to the resulting entity, and ITC is recognised as a vested right/asset, subject to statutory conditions.
5. Nature of ITC: Only CGST and IGST involved
The closing ITC in the Haryana GSTIN of Mventus comprised only CGST and IGST credits - no SGST. This makes the case even more straightforward, as State-specific utilisation restrictions apply primarily to SGST, not to CGST and IGST, which have more flexible utilisation patterns.
6. Proposed workaround due to system restrictions
Recognising the portal limitation, the applicant proposed a workaround if the AAR answered in their favour:
Step 1: Avail the unutilised ITC (CGST + IGST) in Flytxt’s Kerala GSTIN through GSTR-3B; and
Step 2:Simultaneously reverse the same amount via Form DRC-03 in the Haryana GSTIN of Mventus.
7. According to the applicant, this would achieve the same economic effect as a system-driven ITC-02 transfer.
4. Proceedings: No Objection from Jurisdiction, Hearings Conducted
The application was duly forwarded to the jurisdictional officer under Section 98(1) of the CGST Act. Interestingly, no comments were furnished, which the AAR interpreted as indicating:
No specific objection from the department; and
No pending proceedings on the same issue against the applicant.
Personal hearings were held on 10.09.2024 and re-heard on 20.06.2025 due to a change in the composition of the AAR. The applicant’s Director, Sri Anil Kumar Ramachandran, appeared and reiterated the written submissions.
5. AAR’s Analysis: Law Permits, Technology Restricts
5.1 Eligibility to Transfer: No Embargo in Law
The AAR first reproduced and examined the text of Section 18(3) and Rule 41(1). It reached the following key conclusions:
Change in constitution due to merger with provision for transfer of liabilities is clearly present in this case.
The statute explicitly allows transfer of unutilised ITC in the electronic credit ledger of such a registered person to the merged/amalgamated/transferred business.
Crucially, there is no statutory condition that both GSTINs must be in the same State.
On this basis, the AAR held that the law does not put any embargo on transfer of ITC when a registered person undergoes a change in constitution due to merger, amalgamation, etc.
Therefore, Flytxt is legally eligible to transfer the closing ITC balance in the Haryana GSTIN of Mventus to its Kerala GSTIN.
5.2 CGST & IGST vs SGST: Why the Type of Credit Matters
The AAR placed particular emphasis on the composition of the ITC:
The ITC proposed for transfer comprises only CGST and IGST.
No Haryana SGST credit was involved.
The Authority pointed out that Haryana SGST cannot be utilised to pay Kerala SGST - this is an inherent feature of the GST design, where each State’s SGST pool is ring-fenced. If the case had involved SGST credit of Haryana being sought to be shifted to Kerala, there would have been obvious legal and technical issues.
But since only CGST and IGST are involved, the AAR concluded that there is no legal bar stopping their transfer across State boundaries in a merger context, particularly when all other conditions under Section 18(3) and Rule 41 are satisfied.
Thus, the AAR categorically held:
There is nothing in the CGST Act, Rules or corresponding Kerala provisions that forbids the transfer of CGST and IGST on merger of one taxpayer with another, even if the two GSTINs are in different States.
5.3 Rejection of the GSTR-3B + DRC-03 Workaround
The applicant’s proposed workaround - taking ITC in Kerala through GSTR-3B and reversing it in Haryana through DRC-03 - was expressly disapproved by the AAR.
The Authority reasoned that:
Such a method would be procedurally incorrect, as it does not align with the prescribed mechanism under Rule 41 and Form ITC-02.
It may lead to denial of credit, because the credit so availed in Kerala would not appear linked to any proper transfer document, and could be questioned as unsupported during scrutiny or audit.
Instead, the AAR advised the applicant to approach the appropriate jurisdictional authorities for resolution of the technical glitch preventing ITC-02 filing, rather than attempting a unilateral accounting adjustment via returns and voluntary payment forms.
This is a subtle but important message:
Portal limitations must be resolved institutionally, not bypassed by creative but non-prescribed tax positions.
6. The Ruling: A Clear "Yes" - With a Procedural Caveat
Summarising its findings, the Kerala AAR issued the following ruling:
Yes, the applicant is eligible to transfer the closing balance of CGST and IGST appearing in the electronic credit ledger of the Haryana GSTIN of Mventus Solutions Pvt. Ltd. to the Kerala GSTIN of Flytxt Mobile Solutions Pvt. Ltd. on account of merger.
However, to overcome the technical issue of the portal not allowing inter-State ITC-02 transfers, the applicant should approach the appropriate jurisdictional authority for a system-based or administrative resolution.
The suggested self-help route of taking credit in Kerala via GSTR-3B and reversing via DRC-03 in Haryana was held to be incorrect and risky.
7. Key Takeaways for Taxpayers and Practitioners
7.1 Substantive Right to Inter-State ITC Transfer on Merger
The biggest takeaway is conceptual:
Section 18(3) read with Rule 41 does not restrict transfer of ITC to intra-State scenarios.
Where there is a genuine merger/demerger/amalgamation with transfer of liabilities,
ITC can, in principle, move across State GSTINs, at least in respect of CGST and IGST balances, subject to satisfying statutory conditions and following the prescribed procedure.
This ruling, read with earlier AARs (like the one in Andhra Pradesh), strengthens the argument that ITC is an economic asset attached to the business, not to the geographic location of a registration, and should follow the business in restructuring events.
7.2 SGST Remains State-Locked
The ruling carefully notes that Haryana SGST cannot be used for Kerala SGST, and that the present case only involved CGST and IGST.
For practitioners, this reaffirms:
SGST is State-specific and effectively non-transferable across State boundaries from a utilisation perspective.
Restructuring transactions involving SGST balances may need different structuring, write-off decisions, or State-to-State representations at policy level.
7.3 Technology Cannot Curtail Statutory Entitlements
The AAR’s observation that the portal is the source of the problem, not the law, has broader implications:
A software configuration cannot override clear legislative language.
Where the law grants an entitlement (such as transfer of unutilised ITC under Section 18(3)), technical design issues should be escalated and resolved by the authorities, not used as grounds to deny credit.
This gives taxpayers a strong basis to:
Use this ruling as persuasive authority while filing representations with GSTN, jurisdictional Commissioners or IT Grievance Redressal Committees; and
Argue against denial of legitimate ITC purely on account of portal behaviour.
7.4 Avoid "DIY" Adjustments Through Returns
The AAR’s disapproval of the proposed GSTR-3B + DRC-03 workaround is a cautionary note:
Even if the economic effect seems neutral, non-prescribed routes can backfire.
Credit taken without a formally traceable document (like ITC-02) may be questioned as ineligible during assessments or audit.
The message is clear: follow the statutory path, and if the system blocks it, seek administrative or judicial relief - do not invent your own procedure.
7.5 Persuasive, Not Binding, but Highly Relevant
Being an Advance Ruling, this decision is binding only on the applicant and the jurisdictional officers concerned in Kerala. However, it has significant persuasive value for:
Other States facing similar cross-GSTIN merger situations;
Taxpayers undergoing pan-India restructuring who are struggling with stranded ITC in different State registrations; and
Litigation strategies where department objections are rooted more in portal constraints than in legislation.
8. Practical Action Points for Businesses Planning or Having Completed Mergers
1. Plan ITC movement as part of the merger strategy
Treat unutilised ITC (especially CGST & IGST) as a key asset.
Map all State-wise ITC positions as on the effective date of merger.
2. Ensure merger documentation clearly transfers liabilities
Section 18(3) requires specific provision for transfer of liabilities.
NCLT order and scheme should explicitly state that all assets and liabilities, including tax liabilities and credits, vest in the resulting entity.
3. Use ITC-02 wherever portal permits
For same-State mergers, file Form ITC-02 promptly.
Preserve acknowledgements and supporting working papers.
4. For inter-State mergers, prepare to escalate
Where the portal blocks ITC-02 due to different States, document the error messages.
File representations with the jurisdictional officers of both States, attaching:
■ Copy of NCLT order;
■ ITC ledgers;
■ Screenshots of portal errors;
■ Legal note citing Section 18(3), Rule 41 and this Kerala AAR (2025(07)LCX0680(AAR)) as persuasive authority.
5. Avoid unilateral credits and reversals
Do not try to "simulate" ITC-02 through GSTR-3B credits in one State and DRC-03 reversals in another unless expressly permitted by a written clarification from the department.
Such steps may complicate audits and lead to disputes on alleged excess credit.
6. Keep a litigation/representation trail ready
Given that inter-State ITC movement is still a developing area, maintain a clear paper trail to defend your position if challenged later.
9. Conclusion: A Welcome Nudge Towards Substance over Form
The ruling in M/s Flytxt Mobile Solutions Pvt. Ltd. - [2025(07)LCX0680(AAR)] is a strong affirmation of a simple principle:
When the law confers a right to transfer ITC on merger, that right should not be defeated by the design limitations of an electronic portal.
By recognising the legality of inter-State transfer of CGST and IGST credits on merger, and by separating substantive entitlement from technical bottlenecks, the Kerala AAR has provided valuable guidance for cross-border restructurings under GST.
At the same time, its warning against procedural shortcuts is equally important: taxpayers must insist that the system be aligned to the law - not the other way round.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.